Red Capital in Hong Kong

By Yi-Zheng Lian

June 1, 2017

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The share of land that Chinese developers have bought in Hong Kong increased from less than 6 percent of the city’s total in 2009 to 50 percent so far this year.CreditCreditJerome Favre/European Pressphoto Agency

Long before the Chinese conglomerate HNA started making international news — for buying a controlling share of Deutsche Bank or acquiring Ingram Micro, the largest wholesaler of electronic equipment in America — it was familiar to people in Hong Kong as a commercial juggernaut whose aggressive investments threaten to transform the city.

In fact, for residents who have watched Beijing increasingly interfere in Hong Kong’s political affairs since Britain handed it back to China in 1997, the activities of mainland companies like HNA in the territory seem like an ominous sign that the other, economic, shoe is about to drop.

HNA was first a small local airline, set up in the 1990s in Hainan, one of the most corrupt provinces in China. Since then it has become a Fortune Global 500 firm that, among other things, gobbles up Hong Kong’s larger residential developments. Its winning bids in government land auctions over the past half-year reached roughly double the going rate in 2014. HNA may or may not be overpaying for Hong Kong real estate, but it is driving up prices.

Such mainland companies with deep pockets are challenging the local land barons, who came to dominate Hong Kong’s economy as the colonial British trading houses relinquished their positions in the run-up to the handover. For many years these local tycoons have been the most important economic and political actors in Hong Kong. Now they face an existential threat.

Lui Che-woo, the chairman of the Hong Kong conglomerate K. Wah Group, has said that Hong Kong developers stand little chance against investors from the mainland, many of which are backed by powerful Chinese government entities, central or local.

The share of land that Chinese developers have bought in Hong Kong increased from less than 6 percent of the city’s total in 2009 to 30 percent in 2016 and 50 percent so far this year. In contrast, the share of residential sites won by the seven biggest local developers in public auctions has shrunk steadily: from 45 percent in 2012 to 28 percent in 2014 and 22 percent in 2016.

The real estate market isn’t the first domino to fall. Chinese companies have already claimed Hong Kong’s stock market. Last year, more than half of all companies listed on Hong Kong’s two exchanges were entities from the mainland. Their capitalization amounted to 63 percent of Hong Kong’s stock market total, and their shares made up 71 percent of the average daily trade volume.

That’s for economics. But for the Chinese, there is nothing economic that isn’t also political.

James Tien Pei-chun — a former legislator, a former chairman of the pro-business Liberal Party and a tycoon in his own right — turned heads at a public forum in April when he said: “Chinese money buying up land in Hong Kong at sky-high prices has left many local developers with no standing room. In the future, Chinese capital will seep into many livelihood sectors in our city.”

“When a country can fully control our main economic arteries, when the boss has full say,” he added, “the kind of good life and democracy that we all yearn for will be much more difficult to attain.”

Indeed. During local legislative elections last fall, major Chinese state-owned enterprises like the Bank of China and China Resources, a giant import-export company, pressured their employees in Hong Kong to vote for pro-Beijing candidates, according to a Reuters report.

Red capital, as mainland money is sometimes called, may also serve to curb civil society or community activities in Hong Kong. One example: Since at least 2014, property insurance companies with various forms of backing from the mainland have won contracts with homeowners’ associations in Hong Kong’s private residential towers by aggressively undercutting the price of their policies. Some political activists have told me they suspect that these associations have come under pressure to keep pro-democracy advocates from canvassing in those building complexes.

China has employed tactics of this kind in Taiwan. Starting in 2011, Chinese government agents began buying their way into fishing villages in southern Taiwan — an area that traditionally favors independence for the island — by signing forward contracts with fishermen and pre-purchasing entire catches of milkfish at prices significantly above prevailing local rates. If Beijing can do this in Taiwan, it can do this, and other things, even more easily in Hong Kong, which already formally is under its indirect control.

That said, some local pushback is to be expected. The 2014 pro-democracy protests known as the Umbrella Movement may have failed to extract any democratic concessions from Beijing, but they have spawned a new generation of young people who want more autonomy for Hong Kong.

There might also be a reaction from otherwise apolitical quarters. When Denise Ho Wan See, one of the city’s premier pop singers, lost her contract with the company that promoted her performances — apparently because she supported the Umbrella Movement — scores of local businesses raised the money she needed to secure a venue. And that was just pushback about one person’s right to freely express her political views. The influx of money from the mainland already affects all Hong Kongers, if only because it drives up property prices in a city that consistently ranks as one of the least affordable housing markets in the world.

Now some of Hong Kong’s biggest property tycoons may also be feeling that they have to defend their interests against red capital on their home turf. Some of them do business in or with China, but with ordinary people in Hong Kong increasingly feeling the pinch, the tycoons and their political allies may have more reason to protect core local businesses against mainland money.

There already are ordinances restricting mainland Chinese from migrating to Hong Kong, and there are laws prohibiting nonpermanent residents from owning certain critical businesses, such as TV broadcasting. If such regulations have been deemed to comply with the “one country, two systems” policy that governs relations between Hong Kong and the mainland, then some limits on red capital could be acceptable too.

The Basic Law, Hong Kong’s mini-constitution, protects the free movement of foreign capital in and out of the city. But it says nothing that would prevent regulating the use of foreign capital to buy local assets. And in that silence may lie Hong Kongers’ best line of defense against the steady onslaught from the north.